1

Case written by Oriol Amat and Pilar Soldevila (UPF Barcelona School of Management). The authors
thank Group Bon Preu for the information provided. Case published in Revista de Contabilidad y
Dirección / Revista de Comptabilitat i Direcció, n. 12, 2010. Updated version. 2019.

THE WALT DISNEY COMPANY1

1. INTRODUCTION

The Walt Disney Company is an international entertainment and media enterprise with the
aim of becoming the leading producers and providers of entertainment and information
worldwide. The company has operations in four major segments: Media Networks, Parks and
Resorts, Studio Entertainment and Consumer Products, being Media Networks its primary
unit. This unit is responsible for their broadcast and cable television networks (such as
Disney Channel and ESPN), television distribution and production, domestic television
stations and radio networks.

Although Media Network is currently the main activity of the company, it was originally
founded with the objective of carrying business activities in the Studio Entertainment
industry. They are still operating in this sector, producing every year memorable films and
top quality music.

However, it is its large presence in other industries which makes The Walt Disney Company
so special; it is currently also operating in theme parks, cruises, vacation experiences and
consumer products (including toys, books, video games…), making it one of the most
diversified companies of the world.
2. HISTORY

The history of The Walt Disney Company began in 1923, when a very young Walter Elias
Disney and his older brother Roy Oliver Disney, with the helping hand of the animator and
cartoonist Ub Iwerks, decided to create a short film called Alice’s Wonderland during their
stay in Kansas. Their objective was to use it as the first short film of a bigger series called
Alice Comedies, so, with almost no money, Walt Disney went to California to try to sell this
film to a distributor. Fortunately for him, a New York based distributor with the name of
Margaret Winkler showed plenty of interest for his series and decided to work with him. For
this reason, on the 16th October of 1923, he decided to found with his brother The Disney
Bros. Cartoon Studio partnership, the original name of the current corporation The Walt
Disney Company.

After the release and stream of the Alice Comedies series for 4 years, Walt Disney decided to
expand his company creating new characters. For this reason, in 1927 he created the first of
many to come: Oswald the Lucky Rabbit. The series of this new character lasted just for 1
year before the contract with the producer was cancelled, but it gave Walter enough
experience to create his second character: the famous Mickey Mouse. The series based on this
new cartoon mouse became rapidly famous, alongside with his other production The Silly
Symphonies, and let Walt Disney and his company started getting more and more popularity.

From this point, new series began to appear, such as Flowers and Trees (first animated movie
in colour), The Three Little Pigs and The Grasshopper and the ants, all of them being Oscar
Winners, apart from introducing new characters to the previous series such as Pluto, Goofy
and Donald Duck.

1
Case written by Pedro Antonio Pérez, Albert Pérez, Andrea Martín and Mònica Balagué
with the supervision of Professor Oriol Amat. Universitat Pompeu Fabra, 2020.
1
The company was growing at an incredible pace. Throughout the next years, compressed
between 1934 and 1967, many successes were released and the period became the golden age
and time of expansion of the company. Snow White and Seven Dwarfs, Pinocchio, Dumbo,
Bambi, Alice on Wonderland, Peter Pan... were pushing Disney to success. Although the
Second War World took place between these years and made the firm’s profits decline, the
company managed to overcome it and so big was its expansion that in 1954 a TV show called
Disneyland (name also used for many of their theme parks) was launched. It is important to
also mention that in that same year The Walt Disney Company changed its juridical form and
became a public company. The end of the golden age came with the death of Walt Disney, on
December 15 of 1966, due to lung cancer. His brother took over as president of the firm. One
year later, the last big production of Walt Disney, The Jungle book, was published.

The following years were tougher. There were still some great successes, such as Robin
Hood, but after the death of Roy Disney the company struggled to keep the growth it had
during the past decades, with many presidents heading the company and then leaving. The
most important events of this era were the launch of the TV channel Disney Channel in 1983
and the foundation of the Tokyo Disneyland, alongside with the agreement to create Euro
Disney in France.

After these “dark” years, great blockbusters such as The Little Mermaid, The Muppets and
The Beauty and the Beast made the company recover from the previous years. Later on, even
more successes came with Aladdin, The Lion King (the film with the most success of the
1990 decade) and Toy Story (in collaboration with Pixar Animation Studios). During this
time, in 1991 the company started trading in the NYSE.

Finally, during the last decade the company has not only been focused on producing big
famous films (which they did, with plenty of successful productions like Tangle, Brave or
Frozen), but also on expanding their business activities to other areas of entertainment. For
this reason, Disney decided to buy Pixar, Club Penguin, Vooz, Marvel Entertainment,
WideLoad Games and LucasFilm among many others, and created their own Start-up
accelerator. More recently, Disney announced the purchase of 21st Century Fox for more
than 71 billion dollars and the creation of their own streaming service, called Disney+, with
the objective to compete in the online streaming market. The last of these giant operations
was acquiring Hulu in May 2019.

Following the previous explanation, on figure 1 we can see a brief summary with the key
dates of the company.

1923 Foundation of The Disney Bros by Walter Elias Disney and Roy Oliver Disney.
1937 Emission of the first featured film, Snow White and Seven Dwarfs.
1954 The Walt Disney Company change its juridical form and become a public company.
1955 Opening of Disneyland, in California.
1966 Walt Disney dies due to lung cancer, Roy takes over as president of the company.
1971 Roy dies, a trained team manages the company. Opening of the Walt Disney World Resort in Orlando.
1983 The Disney Channel broadcast on American cable system begins.
1992 Opening of the Euro Disney Resort in Paris.
1996 Acquisition of Capital Cities/ABC.
2006 Acquisition of Pixar.
2009 Acquisition of Marvel.
2012 Acquisition of Lucasfilm and its movie franchises Star Wars and Indiana Jones.

2
 2019 Acquisition of 21st Century Fox.
Figure 1. Main dates of The Walt Disney Company. Source: https://d23.com/disney-history/

3. INDUSTRY ANALYSIS AND COMPETITORS

In order to do a proper analysis of Disney’s industry and its competitors, we have to mention
that entertainment is a wide industry with many sectors and Disney, as well as the majority of
its biggest competitors, is a very diversified company, meaning that it has presence in a wide
variety of sectors. Following this idea, we divided Disney’s industry in 4 blocks: studio
entertainment, media network, traveling/theme park sector and merchandise licensing.

3.1. Sales evolution in the industry

Entertainment is an inherent element in humans’ life and it has evolved just like preferences
and technology have. For this reason, there are some sectors where Disney works that are
starting to become less profitable, with the possibility of becoming obsolete soon, whereas it
works in others where the chances of keeping growing are high.

The studio entertainment market (movies) has historically always been a profitable market
for Disney. In fact, it is the industry where Disney started its commercial activity. However,
due to the current availability of free content online, the studio entertainment market’s
revenue relative to its total is in a constant decrease. We can see this trend being confirmed
with the huge decrease on both DVD sales and movie tickets in recent years2.
In the media network market we can observe a very similar pattern. However, although the
traditional TV model also seems to potentially become obsolete in the near future, many
different outcomes are possible thanks to the new consumer trends and technologies.
According to what many experts say3, this sector will be able to expand and even grow more
with the implementation of technologies such as 5G and the adaptation to the traditional TV
model of streaming platforms offering personalized and interactive content.

Regarding theme parks and travelling experiences, its demand has always been increasing.
The main reason for this has been the huge decrease on travelling costs for the last few years,
alongside the current trend on customers to spend more of their budget on leisure
experiences4. Consequently, it is expected that the revenue coming from this industry will
continue growing in the next few years.

Finally, in the consumer product industry Disney has always had good sales. It was one of the
first companies to provide merchandise of its own films and nowadays it is doing even better
with the acquisition of Marvel, Star Wars, some TV series such as Grey’s Anatomy and many
more.
On figure 2 we can observe how the different sources of revenue for Disney are distributed
according to the industry.

2
Sweney, Mark (2017): Film and TV streaming and downloads overtake DVD sales for first
time, The Guardian.
3
Haselton, Todd (2018): The way you get TV and internet at home is about to change
drastically – for the better, CNBC.
4
Sylt, Christian (2018): 'Experience Economy' Boosts Theme Park Spending To A Record
$45 Billion, Forbes.

3
 Figure 2. The Walt Disney Company’s total revenue divided in different
industries.
Source: https://www.statista.com/statistics/193140/revenue-of-the-walt-
disney-company-by-operating-segment/

3.2. Analysis of the industries

Media Networks’ SWOT5

Strengths Weaknesses
▪ They have consumers of all ages. ▪ The classical model of media is “dying”.

▪ Most of the companies in the sector ▪ High competition on having the largest audience
have brand reputation. share.

▪ Diversified products. ▪ Dependence on external factors such as technology,

consumers, etc.

Opportunities Threats
▪ Enormous growth of streaming and ▪ Competition is increasing and the need to pay to
mobile video. different platforms to be able to see all content is
creating a “consumer subscription fatigue”.
▪ Appearance of new technologies such
as virtual reality or 5G. ▪ Mergers between big companies that will allow them
to control the market.
▪ Offering short content on social
networks. ▪ High investments changing the main activities of the
company in order to adapt to new trends.
▪ Globalization of content.
▪ Falling Cable Subscriptions, due to a consumers’
change towards internet.

Figure 3. Strengths, Weaknesses, Opportunities and Threats of Media network’s

industry.

5
Mainly based on the article:
https://www2.deloitte.com/us/en/pages/technology-media-and-
telecommunications/articles/media-and-entertainment-industry-outlook-
trends.html

4
SWOT Parks and Resorts Industry

Strengths Weaknesses
▪ Important parks are well known around the ▪ High sales in this industry are seasonal.
world.
▪ They depend on weather.
▪ Entertainment is never obsolete.
▪ Offering new experiences implies huge investments.

▪ Dependence on customers wealth, when there's a

recession consumption falls a lot.

▪ High cost of operation.

Opportunities Threats
▪ Offering content based experiences such as ▪ The need of innovating.
o popular films, books or series.
▪ Natality rates are diminishing in developed countries
▪ Globalization has opened the market, so and these types of activities are focused mostly on
foreigners can also visit the parks and families.
resorts.
▪ Strong competition.
▪ Establish an eco-friendlier image.

Figure 4. Strengths, Weaknesses, Opportunities and Threats of Parks and Resorts’

industry.

SWOT Studio Entertainment Industry

Strengths Weaknesses
▪ Entertainment is never obsolete. ▪ Not a first necessity product.

▪ Consumed by almost 100% of the target ▪ Highly affected by macroeconomic shifts.

market in at least some of its shapes.
▪ Piracy is common theme.
▪ High adaptability.
▪ Very volatile market.
▪ Being able to produce any type of
merchandise (clothing, video games, home ▪ The need of being constantly innovative.
items...).

Opportunities Threats
▪ There will always be new children to make ▪ On a long term basis, natality rate is lowering in
new films for. developed countries, where this industry is the
strongest.
▪ Subscription services.
▪ High competition.
▪ Film remakes or spin-offs.
▪ Streaming media platforms.

▪ Intellectual property rights.

Figure 5. Strengths, Weaknesses, Opportunities and Threats of Studio Entertainment’s

industry.

5
As we have seen, Disney operates in many business lines.

To stay competitive in the entertainment industry, companies must be very adaptable to the
tastes of their consumers. The main threat they face is the late switch of consumers to
streaming media platforms, which has caused a loss of consumers for Disney. Nevertheless,
Disney has already made investments and partnerships with BAMTech, AT&T/DirecTV,
Hulu, PlayStation Vue, and Sling TV which are actively addressing these concerns and
moving the company towards streaming distribution.

They are also concerned about the preservation of the intellectual property rights, the digital
content piracy and the increasing competition. However, Disney is avoiding this risk because
they control their original content through Disney Channel, ESPN, ABC and cannot be
distributed by other media networks.

Regarding the theme parks industry, Disney is leading the market, having its closest
competitor quite below. The popularity of Disney’s theme parks has widened throughout the
world, making the threats of new parks (like the opening of The Wizarding World of Harry
Potter at Universal Orlando Resort theme park) or competitors to be loose.

Finally, in the Consumer Products and Interactive Media Industry, technology is playing a
big role. There is the threat of losing many consumers in the sales of physical toys, however,
it is compensated with the opportunities in the sales of video games’ world. In this sector,
Disney is quite close to its principal competitor and market leader Mattel Inc.

3.3. Main competitors

Since The Walt Disney Company is present in many market sectors, the number of
competitors it has to face is also high.

If we focus on the activity where Disney made its name, studio entertainment, we can clearly
see that some of its biggest competitors are:

Warner Media (TWX), with its subsidiary Warner Bros. It is one of the biggest cinema
producers of the world and has always been one of its historical competitors.

Viacom (VIA), owning two of the best well-known cinema production studios (Paramount
Pictures and DreamWorks, among others), has also been one of its strongest competitors for
the last few decades.
Sony (SNE), which also has a subsidiary focused on film production (Sony Pictures
Entertainment).
When talking about its competitors in the media network industry, it is important to mention
that this market has hugely increased, in terms of participants, during the last few years. This
has been mainly caused by the appearance of online streaming platforms. Therefore, the
competitive pressure Disney is facing nowadays is much higher than some years ago. Said
this, the main competitors Disney has at the moment are:

Comcast (CMCS), the second biggest media conglomerate in the world, right after Disney.
It is the owner of the cable television distributor Xfinity and the television channels CNBC,
TeleMundo, Syfy and USA Network, among many others.

CBS Corporation (CBS), with its television channel CBS Broadcasting and many radio
stations. It has also been one of its historical competitors.

6
Netflix (NFLX), growing at an incredible pace. Its main activity is based on offering films,
series and other types of audio-visual content through their online streaming service. It has
been around since 1997 but has become extremely popular in the last decade.

Very recently, in the year 2019, Disney merged with one of its greatest competitors, 21st
Century Fox, making it by far the biggest company in the industry. For this reason, we can
affirm that it has plenty of different competitors, but almost none of them is as big as Disney
is.
Regarding to the travelling and theme-park market, its major adversaries are:

Universal Studios, owned by Comcast (CMCS). They manage 4 theme parks (Hollywood,
Orlando, Singapore and Japan) and are building 3 more (Moscow, South Korea and Beijing).

Six Flags Entertainment (SIX), with parks in the US, Canada and Mexico.
Cedar Fair (FUN), owning 12 amusement parks, 5 water parks and 5 hotels.

Fortunately for Disney and their competitors, the barriers of entry on the theme park industry
are very high; the acquisition of land, the purchase of all the materials, the cost of
construction and the cost of managing it all require huge investments of capital that only a
few companies can do.
Finally, in the merchandise licensing industry Disney is extremely good positioned. It was
one of the earliest companies to sell merchandise from its films and now it has the intellectual
property rights of not only his own company, but also of other important brands such as
Marvel, LucasArts and more recently all FOX’s labels, such as The Simpsons. One aspect to
know is that Disney does not sell its own products, but it sells the intellectual property rights
of selling products with its name. For this reason, if we are talking about intellectual property
competitors we would state The Coca-Cola Company (KO) and Warner Media (TWX).
Nevertheless, if we are talking about the sale of merchandise products licenses, its main
competitors would be Mattel (MAT) and Hasbro (HAS).
3.4. Sales ranking

The Walt Disney Company is one of the leading companies in terms of sales revenue in every
industry they operate in. In fact, they are the biggest company in terms of sales revenue in 2
of their 3 main sectors, and the second one on the other.

Starting with studio entertainment, The Walt Disney Company earned last year almost 10
billion US dollars, 7.3 billion of them just in the US, representing 26% of the total revenues
of the industry and being the leader. What is even more impressive is the tremendous growth
that Disney has had in the last 10 years 6. Following figure 6, we can clearly see how 10 years
ago it just accumulated 10.5% of market share, less than half of the current number.

6
Whitten, Sarah (2019): Disney on pace to earn a record $9 billion at the global box office in
2019, CNBC.

7
Moreover, it is key to remember that on this present year The Walt Disney Company has
acquired one of its biggest competitors, 21st Century Fox, making the expectations of both
revenues and market share for next year raise even higher.

Figure 6. Revenues of Disney in the studio entertainment industry as share of total

market. Source: https://www.cnbc.com/2019/06/14/disney-on-pace-to-earn-9-billion-at-the-
global-box-office-in-2019.html

Continuing with amusement parks, Disney is also the leader by far. It is their fastest-growing
sector, and they are currently taking advantage of this incredible expansion by investing huge
amounts of money in order to keep the momentum going. In fact, research shows that Disney
is now investing more money on theme parks than it did on buying Marvel, Pixar and
Lucasfilm altogether7.

Figure 7. Leading amusement and theme park companies worldwide in 2015, by

revenue. Source: https://www.statista.com/statistics/258810/theme-und-amusement-park-
companies-ranked-by-revenue/

67
Barnes, Brooks (2018): Disney Is Spending More on Theme Parks Than It Did on Pixar,
Marvel and Lucasfilm Combined, The New York Times.

8
Finally, in their biggest industry, media networks, Disney is positioned as the second biggest
earner. It is impressive how non-exclusive media companies are those leading the table. On
figure 8, we can observe this pattern:

Figure 8. Biggest media companies by revenue in 2016.

Source:
https://www.businessinsider.com/the-30-biggest-media-owners-in-the-world-2016-5?IR=T

4. QUALITATIVE ANALYSIS

The Walt Disney Company, just like any other company, has both positive and negative
aspects. If we focus on the qualitative features, we can classify them according to figure 9.

STRENG
THS WEAKNESSES

WHO ▪ Experienced an trained executive ▪ High attrition rate (employee

d
officers. turnover).

▪ Highly skilled workforce through ▪ Yearly compensation growth of CEO

successful training and learning programs. does not correlate with the
company's
performance.
▪ Loyal customers

WHAT ▪ Strong brand name, operating across 40 ▪ Strong competition (Disney’s

countries approximately. products are more expensive).
▪

▪ High quality products and experiences. Having to adapt continuously to

consumers’ volatile preferences.
▪ Excellent image in the media industry and
a large subscriber base. ▪ Several of Disney’s businesses are
affected by
seasonality.
9
 ▪ Strong negotiation skills.
▪ consumers
Change in ’ patterns:
▪ Diversified portfolio of
products. many toys are replaced by video
games.
▪ Global presence and
popularity.

HOW ▪ Corporate governance, operating their Expansion through acquisition

businesses with the utmost integrity. rather than internal expansion.

▪ Strong cooperative growth among ▪ Partial loss of their former essence

business
segments. of a film studio.

▪ Corporate social responsibility, referring to

their honourable and ethical manner to
operate their businesses.

▪ Concerned about the environmental

impact.

Figure 9. Qualitative analysis using the “Who, What, How” technique.

5. PRESENT SITUATION OF THE COMPANY

5.1. Products and services offered

Walt Disney has become during the last decades a diversified empire. It has created a wide
range of products in numerous different sectors, working in many different industries such as
the entertainment sector and the network media, being one of the biggest conglomerates in
the world. For this reason, Disney is not only known for its many famous films, but also for
its successful TV productions, highly visited theme parks and recognisable merchandising.

In the media and TV sector, Disney owns the ABC television network, one of the biggest
American TV commercial channels, with eight broadcasting stations and over 230 affiliates.
Alongside ABC, Disney has also the property rights of many other cable networks, including
Freeform, Disney Channel, The History Channel and ESPN.

If we focus on the film sector, it owns plenty of different subsidiaries specialized in the
production of films and the animation process. Some of these well-known subsidiaries are
Walt Disney Pictures, Disney Animation and Pixar, all of them producing films for Walt
Disney Studios and Lucasfilm. Moreover, it also owns big brands such as Marvel, Star Wars,
Grey’s Anatomy and Indiana Jones, among many others.

Disney also works in both the travelling and theme park industry, with the Disney Cruise
Line offering vacations and family-friendly cruises, and with a big amount of theme parks all
over the world offering unique experiences and adventures. Some of these theme parks are

10
the famous Walt Disney World (Florida, USA), Disneyland (California, USA) and
Disneyland Paris (France).
5.2. Customers and distribution channels
Being a very huge and diversified company, The Walt Disney Company has millions of
customers all over the world.
The fact that Disney operates in so many different areas lets them have a wide variety of
customers with many different characteristics. From children to adults and from movies’ fans
to sport fans, customers of very different tastes can enjoy Disney’s products.
For instance, their family-friendly movies target a very young audience as their main
consumers, but these films are also very popular among adults of all ages.
Another good example is their presence on cable television, where their numerous and
segmented TV channels offer plenty of different entertainment models to highly
differentiated audiences.

For this exact reason, the distribution channels of the company are very extensive. Disney’s
products reach their customers in many different manners: their films are distributed through
cinemas firstly and then through TV, their TV programmes reach their customers by cable
TV channels, their merchandise products are sold mainly in retail stores and their theme
parks and cruises are advertised on TV, among many others.

Furthermore, to the previous list of distribution channels we need to add one: Disney Plus.
Very recently, on November 2019, the company has launched in the USA their own
streaming service where they will offer more than 400 films and 7500 episodes of TV series
through their online platform. It is expected that this service will be also launched in Europe
during the first months of 2020.
5.3.Key success factors

Strong brand name: Disney is well-known worldwide for its classical animated-film
characters, which have become a symbol of entertainment throughout history. The creation of
historical characters and films have let them hold a reputable and respected brand name all
over the world.
Diversification: The company has been able to expand their business operations into other
areas of entertainment, such as theme parks and cable TV channels. This expansion has not
only helped the company not to put all their eggs in the same basket and reduce risk, but also
it has given the opportunity of becoming leaders in other very profitable markets.

Acquisitions: The absorption of the competition has given Disney a bigger market share,
more market control and a lead way into other segments of the entertainment industry.

Absolute quality: Disney is famous for its global successes with its high-quality films.
Nonetheless, it provides absolute quality in every sector they operate in. Their objective is to
provide unforgettable experiences through their theme parks and cruises, clear and
professional information through their media channels and enjoyable and emotive content
through their films and series, and they know that the only way to achieve it is to provide top
quality always.

Wide range of customers: The characters used in their films, just like their theme parks and
vacation experiences, are suitable for all audiences. Furthermore, having the property rights
of many media networks lets them expand their customer target to a lot of different groups of
population.

Innovation: History shows that Disney has always bet on innovation. They projected the first
animated movie in color of all time, and since then they have always tried to be the leaders in

11
innovation of the industry. One of the most recent examples is their approach to streaming
services, with the creation of Disney Plus.

Long-lasting product: Disney films and characters have become a symbol. The stories that
Disney has been able to explain through its characters never get old, and every new
generation that comes feels exactly the same way as the previous one when watching their
films. For this reason, we can affirm that their movies’ popularity will last for many more
years.

6. MAIN PROBLEMS AND CHALLENGES THE COMPANY IS FACING NOW

Loss of subscribers in the ESPN: The Walt Disney Company has been recently holding
fewer subscribers in their Entertainment and Sports Programming Network. The main reason
for this challenge is that other internet platforms are offering the same services with lower
prices, resulting in more expensive prices in regard to watching the same sports through
Disney.

Dilution of their own identity: From the 10 films released by Disney in 2018, only 5 were
directed from their own studio. Moreover, the most successful ones were Black Panther,
Avengers: Infinity II and Incredibles 2 from their studios’ acquisitions. Although two of their
own productions could be deemed moderate successes, their brand deposits did not pay off
nearly as much as they should.

Entrance of new technologies: The entertainment industry is changing rapidly and moving
towards the possibilities that new technologies offer, such as the recent online streaming
platforms. If Disney wants to keep being a leader on the industry, it should also adapt their
distribution channels in order to satisfy the growing demand of online content. In fact, this is
what they are trying to do with Disney Plus, but it is still very early to know whether this
platform will be able to compete with the current streaming giants like Netflix and HBO or
won’t have the expected impact on consumers.

Its life after Bob Iger: The current CEO of the company, Bob Iger, has given Disney the
stability that the company needed in order to keep growing. He has been the main responsible
of all Disney successes from the last decade and a half, including the ambitious acquisitions
of Pixar, Marvel, and more recently The 21st Century Fox, among many others. His
leadership skills have been widely recognized and for many people he is considered as one of
the most successful CEO of the past decade. However, he is already 68 years old and
retirement will sooner or later come. On that day, Disney will have to face a huge problem:
finding someone to replace Bob Iger that can do at least as good as his predecessor.

Historical stereotypes and criticism: Many people believe that Disney films are not
adequate for children, since they are full of subliminal ideas and hidden messages. For
instance, princesses are always portrayed as extremely thin girls, giving the idea that only
thin women can be attractive. Another very good example is the relevance of social status of
the characters, coming Heroes from high social status families and many times being ideally
handsome. In fact, there are studies showing that children might be affected by Disney films
when understanding the world, like the research done by Sarah Coyne at Brigham Young
University8 and published in the BBC, which literally states that “the engagement with
Disney princesses in young girls around two years old was associated with greater female
gender-stereotype behaviour and lower body self-esteem a year later”. If Disney wants to
continue at the top, it needs to find an alternative to portray their characters without offending
anyone or causing misinterpretations on children.

8
Gray, Richard (2019): Did Disney shape how you see the world?, BBC.

12
Unhappy workers: Disney products may represent happiness and fantasy, but their workers
are not that satisfied. Their wages are very low, with more than 80% of people working on
Disneyland making less than 12 USD dollars per hour and almost 75% saying that they
cannot cover their basic needs with those salaries. According to Holland9 there are workers
living in extremely poor conditions, some of them saying incredibly impacting words like “I
don’t know how I can maintain this face of joy and warmth when I have to go home and
forage for food in other people’s garbage” and “Since I started working for Disney, because
my wages are so low, I had to move my 16-year-old daughter out of the house. I currently
don’t make enough to eat three times a day”. This is a huge problem for Disney which
should be resolved as soon as possible.

Environmental degradation: Although they are working towards resolving this problem,
Disney’s impact on the environment is still huge. They are reducing the emissions that they
directly produce, but at the end of the day their business model is still based on having
thousands of people visiting their parks and resorts every day, producing an incomparable
amount of pollution with the use of transport. If the company wants to fully integrate their
business into a zero-emissions model, they first need to find solutions to reduce the carbon
footprint of their visitors.
7. FUNDAMENTAL ANALYSIS OF THE STOCK

The Walt Disney Company is trading in the New York Stock Exchange (NYSE) since 1968
with the ticker $DIS. As of today, 11th December 2019, it has a market capitalization of
almost 264 billion USD, divided in 1.802 billion shares outstanding. As it is explained below,
its shares are relatively stable and very liquid, giving positive returns during the last few
years and with a sustainable dividend policy. It currently has 223,000 employees all over the
world, making it a huge international company able to generate profits in many parts of the
globe. All the information presented below corresponds to 11th December 2019.
Its shares are currently trading at 146.10 USD, very close to its all-time high of 153.41 USD,
recorded on November 2019 (figure 10).

Figure 10. Evolution of $DIS share price since 2015.

Source: https://www.tradingview.com/symbols/NYSE-DIS/

During this last year, it has had a very positive performance, giving a 30.5% return to its
investors. In comparison, the overall US entertainment industry has had a return of 23.4%,

9
Holland, Michael (2019): Disney heiress says employees unhappy with working conditions,
New York Post.

1
being anyways a very positive year compared to the total US market, with a much lower
return of 17.8% (although it is also very high).

If we focus on the performance of Disney in a 5-year timeframe, the return is 62%, being
slightly above the overall US market (52.4%) but not achieving to beat its industry rivals,
with a much higher average return of 94.6%. Following this previous explanation, we can see
that much of its 5-year return has taken place during the last 12 months.
Its P/E ratio is currently around 23.8, meaning that the earnings that they achieve represent
approximately 4.20% of the value of their market capitalization. Comparatively, the P/E of
the entertainment industry is 24.5, being above Disney. Hence, acquiring Disney shares is
relatively cheaper than acquiring shares from its direct competitors, whose earnings just
represent 4.08% of their market capitalization.

Looking at the Price/Book value, the ratio is approximately 2.81. The average of the industry
is around 2.6, giving the signal that Disney might be slightly overvalued when comparing this
ratio with its competitors. However, this might also show that investors see a better future in
Disney than in its competitors, so they are willing to pay more for its shares. When talking
about its volatility, Disney shares’ beta for the last 5 years is around 1.02. This means that its
price is stable, with changes in price very similar to the average of the market (whose beta is
obviously 1) and does not suffer huge and rapid changes of valuation very often.

Past performance

During the last five years, Disney has had an average earnings growth of 9.6%,
underperforming the average of the industry with a 13.6%. This can be understood, since
Disney is an already consolidated company in the industry with a stable position.

Dividend policy

The current annual dividend yield is 1.20%, just like the average of the entertainment
industry. This means that the company pays 1.75 USD per share this year.

Looking at its evolution, the annual dividend has a history of continuous increases year to
year. As we can see in figure 11, the company has constantly increased its dividend pay-out
for the last 10 years, paying just 0.35 USD in 2008, 5 times less than now.

Figure 11. Evolution of The Walt Disney Company dividend pay-out since 1982.
Source: https://wallmine.com/nyse/dis

When looking at the dividend in terms of coverage, their pay-out ratio is slightly higher than
one fourth, meaning that they only distribute in dividends approximately one out of four
dollars they achieve in profits. In other words, all their dividend pay-out is well-covered by
the profits and most of them are kept inside the company.

1
Questions to answer
1. Analysis of the different Disney ratios compared to the industry average
2. Main Financial Strengths and Weaknesses of Disney.
3. Analysis of Disney’s working capital and working capital needed.
4. Computations of the UPF Z score since 2015 and their interpretation.
5. Disney’s capacity to grow according the Higgins model.
6. Represent in a cause and effect diagram the different positive and negative aspects of
the company and how they are related.
7. Recommendations to Disney.
8. Demonstrate the previous recommendations.

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 111213
8. APPENDIX: DISNEY’S CONSOLIDATED FINANCIAL STATEMENTS:
Average sector
Average
sector % with profits % 2019 % 2018 % 2017 % 2016 % 2015 %

Non-current assets 85317 87,41% 109772 88,04% 165860 85,50% 81773 82,94% 79900 83,41% 75067 81,57% 71424 81,00%

Intangible assets 26880 27,54% 34949 28,03% 23215 11,97% 6812 6,91% 6995 7,30% 6949 7,55% 7172 8,13%

Parks, resorts and other properties 39492 40,46% 50735 40,69% 58589 30,20% 55238 56,02% 54043 56,42% 50270 54,62% 42745 48,47%

Depreciation -21879 -22,42% -28055 -22,50% -32415 -16,71% -30764 -31,20% -29037 -30,31% -26849 -29,17% -24844 -28,17%

Land 766 0,78% 971 0,78% 1165 0,60% 1124 1,14% 1255 1,31% 1244 1,35% 1250 1,42%

Projects in progress 985 1,01% 1314 1,05% 4264 2,20% 3942 4,00% 2145 2,24% 2684 2,92% 6028 6,84%

Long-term investments 3756 3,85% 4877 3,91% 3224 1,66% 2899 2,94% 3202 3,34% 4280 4,65% 2643 3,00%

Film and television costs 3931 4,03% 5242 4,20% 22810 11,76% 7888 8,00% 7481 7,81% 6339 6,89% 6183 7,01%

Goodwill 28562 29,26% 36344 29,15% 80293 41,39% 31269 31,71% 31426 32,81% 27810 30,22% 27826 31,56%

Other Assets 2754 2,82% 3395 2,72% 4715 2,43% 3365 3,41% 2390 2,50% 2340 2,54% 2421 2,75%

Deferred income taxes 70 0,07% 0 0,00% 0 0,00% 0 0,00% 0 0,00% 0 0,00% 0 0,00%

Current Assets 12286 12,59% 14916 11,96% 28124 14,50% 16825 17,06% 15889 16,59% 16966 18,43% 16758 19,00%

Inventory 1603 1,64% 1673 1,34% 1649 0,85% 1392 1,41% 1373 1,43% 1390 1,51% 1571 1,78%

Television costs and advances 328 0,34% 438 0,35% 4597 2,37% 1314 1,33% 1278 1,33% 1208 1,31% 1170 1,33%

Accounts receivable 6298 6,45% 7860 6,30% 15481 7,98% 9334 9,47% 8633 9,01% 9065 9,85% 8019 9,09%

Short term accruals 0 0,00% 0 0,00% 0 0,00% 476 0,48% 445 0,46% 449 0,49% 469 0,53%

Other current assets 1168 1,20% 1612 1,29% 979 0,50% 159 0,16% 143 0,15% 244 0,27% 493 0,56%

Deferred income taxes 0 0,00% 0 0,00% 0 0,00% 0 0,00% 0 0,00% 0 0,00% 767 0,87%

Cash and cash equivalents 2889 2,96% 3174 2,55% 5418 2,79% 4150 4,21% 4017 4,19% 4610 5,01% 4269 4,84%

Total Assets 97603 100,00% 124688 100,00% 193984 100,00% 98598 100,00% 95789 100,00% 92033 100,00% 88182 100,00%

11
In order to compute the average sector we used data from Comcast, Viacom, News Corp and Disney in the year 2018. The average sector with profits is computed excluding News Corp.
12
Since the financial statements of these companies have not the same accounts, the accounts used in the averages have been adapted to the available information.
13
2019’s statements are unaudited. The complete annual report has not been disclosed yet, but only condensed financial statements.

1
 Average sector
Average with
sector % profits % 2019 % 2018 % 2017 % 2016 % 2015 %

Net Equity 35819 36,70% 49442 39,65% 93889 48,40% 52832 53,58% 45004 46,98% 47323 51,42% 48655 55,18%

Common stock 0 0,00% 0 0,00% 53907 27,79% 36.779 37,30% 36248 37,84% 35859 38,96% 35122 39,83%

Retained Earnings 35265 36,13% 47742 38,29% 42494 21,91% 82679 83,85% 72606 75,80% 66088 71,81% 59028 66,94%
Accumulated other comprehensive
loss -1269 -1,30% -1401 -1,12% -6617 -3,41% -3097 -3,14% -3528 -3,68% -3979 -4,32% -2421 -2,75%
Treasury stock, at cost, 1.4 billion - - - -
shares -23917 -24,50% -25051 -20,09% -907 -0,47% 67588 -68,55% 64011 -66,83% 54703 -59,44% 47204 -53,53%

Additional Paid-in Capital 14982 15,35% 15869 12,73% 0 0,00% 0 0,00% 0 0,00% 0 0,00% 0 0,00%
Total Company Shareholders’
equity 34271 35,11% 42598 34,16% 88877 45,82% 48.773 49,47% 41.315 43,13% 43.265 47,01% 44.525 50,49%

Noncontrolling interests 1548 1,59% 1669 1,34% 5012 2,58% 4.059 4,12% 3.689 3,85% 4.058 4,41% 4.130 4,68%

Non-current Liabilities 48576 49,77% 63916 51,26% 68574 35,35% 27.906 28,30% 31.190 32,56% 27.868 30,28% 23.193 26,30%
Redeemable noncontrolling
interests 671 0,69% 895 0,72% 8963 4,62% 1.123 1,14% 1.148 1,20% 0 0,00% 0 0,00%

Other long term liabilities 6200 6,35% 8042 6,45% 13.580 7,00% 6.590 6,68% 6.443 6,73% 7.706 8,37% 6.369 7,22%

Deferred income taxes 7846 8,04% 10331 8,29% 7.902 4,07% 3.109 3,15% 4.480 4,68% 3.679 4,00% 4.051 4,59%

Borrowings 33859 34,69% 44648 35,81% 38.129 19,66% 17.084 17,33% 19.119 19,96% 16.483 17,91% 12.773 14,48%

Current Liabilities 13203 13,53% 16506 13,24% 31.521 16,25% 17.860 18,11% 19.595 20,46% 16.842 18,30% 16.334 18,52%

Current portion of borrowing 2304 2,36% 2918 2,34% 8.857 4,57% 3.790 3,84% 6.172 6,44% 3.687 4,01% 4.563 5,17%
Accounts payable and other
accrued liabilities 8977 9,20% 11198 8,98% 17.942 9,25% 9.479 9,61% 8.855 9,24% 9.130 9,92% 7.844 8,90%

Deferred revenue and other 1922 1,97% 2390 1,92% 4.722 2,43% 4.591 4,66% 4.568 4,77% 4.025 4,37% 3.927 4,45%
Total Equity and Liabilities
97603 100,00% 124688 100,00% 193.984 100,00% 98.598 100,00% 95.789 100,00% 92.033 100,00% 88.182 100,00%
Figure 12. Disney’s Consolidated Balance Sheet in US GAAP (2015-2019) (in millions of $)
Source: Disney’s Annual Reports

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 Average Average sector
sector % with profits % 2019 2018 % 2017 % 2016 % 2015 %
Revenues 44070 100,00% 55752 100,00% 69.570 100,00% 59434 100,00% 55137 100,00% 55632 100,00% 52,465 100,00%
- - - - -
Cost of products and services -17392 -39,46% -21555 -38,66% 57.719 -82,97% 32726 -55,06% 30306 -54,96% 29993 -53,91% 28,364 -54,06%

Gross margin 26678 60,54% 34197 61,34% 11.851 17,03% 26.708 44,94% 24831 45,04% 25639 46,09% 24,101 45,94%
Selling, general & administrative -5500 -12,48% -6317 -11,33% 0 0,00% -8860 -14,91% -8176 -14,83% -8754 -15,74% -8,523 -16,25%

Depreciation and amortization -3678 -8,35% -4747 -8,51% 0 0,00% -3011 -5,07% -2782 -5,05% -2527 -4,54% -2,354 -4,49%

Impairment of assets -152 -0,34% -86 -0,15% -1.183 -1,70% -33 -0,06% -98 -0,18% -156 -0,28% -53 -101,02%

OPERATING RESULT (EBIT) 17348 39,36% 23047 41,34% 10.668 15,33% 14804 24,91% 13775 24,98% 14202 25,53% 13171 25104,36%

Other income, net 7 0,02% 117 0,21% 5.028 7,23% 601 1,01% 78 0,14% 0 0,00% 0 0,00%

Interest expense -1171 -2,66% -1559 -2,80% -978 -1,41% -574 -0,97% -385 -0,70% -260 -0,47% -117 -223,01%

Equity in income of investees -275 -0,62% -31 -0,06% -103 -0,15% -102 -0,17% 320 0,58% 926 1,66% 814 1551,51%
Earnings before taxes
(EBT) 15909 36,10% 21575 38,70% 14.615 21,01% 14729 24,78% 13788 25,01% 14868 26,73% 13,868 26,43%

Income Tax -1417 -3,22% -1771 -3,18% -3.031 -4,36% -1663 -2,80% -4422 -8,02% -5078 -9,13% -5,016 -9,56%

NET INCOME 14492 32,88% 19804 35,52% 11.584 16,65% 13066 21,98% 9366 16,99% 9790 17,60% 8,852 16,87%
Net income attributable to non-controlling
interests -177 -0,40% -213 -0,38% -530 -0,76% -468 -0,79% -386 -0,70% -399 -0,72% -470 -895,84%

Net income attributable to the Company 14315 32,48% 19591 35,14% 11.054 15,89% 12598 21,20% 8890 16,12% 9391 16,88% 8,382 15,98%
Figure 13. Disney’s Consolidated Income Statement in US GAAP (2015-2019) (in millions of $)
Source: Disney’s Annual Reports

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 2019 2018 2017 2016 2015

Operating Activities

Net income 10913 13066 9366 9790 8852

Depreciation and amortization 4160 3011 2782 2527 2354

Gains on acquisitions and dispositions -4794 -560 -289 -26 -91

Deferred income taxes 117 -1573 334 1214 -102

Equity in the income (loss) of investees 103 102 -320 -926 -814

Cash distributions received from equity investees 754 775 788 799 752
Net change in film and television costs and
advances -542 -523 -1075 -101 -922
Equity-based compensation 711 393 364 393 410

Other 206 441 503 674 314

Changes in operating assets and liabilities: 0 0 0 0 0

Receivables 55 -720 107 -393 -211

Inventories -223 -17 -5 186 1

Other assets 932 -927 -52 -443 34

Accounts payable and other accrued liabilities 191 235 -368 40 -49

Income taxes -6599 592 208 -598 354

Cash provided by operations 5984 14295 12343 13136 10909

Investing activities
Investment in parks, resorts and other property -4876 -4465 -3623 -4773 -4265

Acquisitions -9901 -1581 -417 -850 0

Other 319 710 -71 -135 20

Cash used in investing activities -15096 -5336 -4111 -5758 4245

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Financing activities
Commercial paper borrowings/(payments), net 4318 -1768 1247 -920 2376

Borrowings 38240 1056 4820 6065 2550

Reduction of borrowings -38881 -1871 -2364 -2205 -2221

Dividends -2895 -2515 -2445 -2313 -3063

Repurchases of common stock 0 -3577 -9368 -7499 -6095

Proceeds from exercise of stock options 318 210 276 259 329

Contributions from noncontrolling interest holders 737 399 17 0 1012

Acquisition of noncontrolling and redeemable
noncontrolling interests -1430 0 0 0 0
Other -871 -777 -1142 -607 -402

Cash used in financing activities -464 -8843 -8959 -7220 -5514

Cash from discontinued operations

Cash provided from operations - discontinued operations 622 0 0 0 0

Cash provided by investing activities - discontinued
operations 10978 0 0 0 0
Cash used in financing activities - discontinued operations -626 0 0 0 0

Cash used in discontinued operations 10974 0 0 0 0

Impact on exchange rates on cash, cash equivalents and
restricted cash -98 -25 31 -123 -302

Change in cash, cash equivalents and restricted cash 1300 91 -696 35 848

Cash, cash equivalents and restricted cash, beginning of year 4155 4064 4760 4725 3421

Cash, cash equivalents and restricted cash, end of year 5455 4155 4064 4760 4269

Figure 14. Disney’s Consolidated Cash Flow Statement in US GAAP (2015-2019) (in millions of $)
Source: Disney’s Annual Reports

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 Average Average sector with
sector profits 2019 2018 2017 2016 2015

DEBT AND CAPITALIZATION

Debt= Liability / Assets 0,633 0,645 0,52 0,46 0,53 0,49 0,45

Debt Quality= Current Liabilities / Total Liabilities 0,214 0,205 0,31 0,39 0,39 0,38 0,41

Repayment Capacity= Cash flow /Loans 0,498 0,512 0,24 0,75 0,46 0,59 0,62

Cost of debt= Financial Expenses / Loans 0,032 0,033 0,021 0,027 0,015 0,013 0,007

Financial Expenses= Financial Expenses / Sales 0,027 0,028 0,014 0,010 0,007 0,005 0,002

LIQUIDITY

Liquidity= Current Assets / Current Liabilities 0,93 0,90 0,89 0,94 0,81 1,01 1,03

Treasury= Debtors + Cash / Current Liabilities 0,70 0,67 0,66 0,75 0,65 0,81 0,75

Acid Test= Cash / Current Liabilities 0,22 0,19 0,17 0,23 0,21 0,27 0,26

Z (UPF)= -3,9 + 1,28 CA/CL+ 6,1 E/A+ 6,5 NI/A+ 4,8 NI/E 2,39 2,57 1,00 2,39 1,41 1,96 2,01
Working Capital (real) (euros)= Current assets – Current
liabilities -917 -1590 -3397 -1035 -3706 124 424
Operating Working Capital (euros)= Operating current assets –
Operating current liabilities -510 -792 -1403 -923 -870 -323 414
Operating CA= Inventory + Clients + Other operating CA +
Minimum cash required 10389 12796 21261 13147 12554 12832 12185

Operating CL= Suppliers + Other operating CL + Accruals 10899 13588 22664 14070 13423 13155 11771

Working Capital Deficit (euros) -407 -798 -1994 -112 -2837 447 10

ASSETS MANAGEMENT

Non-current assets turnover= Sales / Non-current assets 0,52 0,51 0,42 0,73 0,69 0,74 0,73

Current assets turnover= Sales / Current assets 3,59 3,74 2,47 3,53 3,47 3,28 3,13

DEADLINES

Inventories days=Stocks / Daily cost of sales 34 28 10 16 17 17 20

Days receivable (days)= Clients / Daily Sales 52 51 81 57 57 59 56

Days payables (days)= Suppliers / Daily cost of sales 188 190 113 106 107 111 101

SALES

Sales growth= Last year’s sales / Previous year sales - - 1,17 1,08 0,99 1,06 1,30

PROFITABILITY, SELF-FINANCING AND GROWTH

Return on assets= EBIT / Assets 0,18 0,18 0,05 0,15 0,14 0,15 0,15

Return on equity =Net Income / Equity 0,42 0,46 0,12 0,26 0,22 0,22 0,19

Cash flow / Assets 0,19 0,20 0,06 0,16 0,12 0,13 0,12

Dividends / Net profit 0,11 0,11 0,26 0,20 0,28 0,25 0,37

Dividends / Net equity 0,05 0,05 0,03 0,05 0,06 0,05 0,07

Dividends per year 1586,75 2063,00 2895,00 2515,00 2445,00 2313,00 3063,00

Dividends per share 0,86 1,08 - 1.68 1.56 1.42 1.81

Figure 15. Some Disney’s and Average Industry Ratios (2015-2019)

Source: Self-made

2
THE WALT DISNEY COMPANY. Proposed answers to the case10

1. Analysis of the different Disney ratios compared to the industry average

Debt ratios

Regarding indebtedness, Disney has twice as much assets as debt. Moreover, looking at the
average sectors with profits, the ratio is higher. This is a good sign as it shows that Disney
has a larger equity and it’s being able to self-finance more than other companies in the same
sector, or what it is the same, that is being able to operate with around a 20% less debt than
the average.

Looking to the Quality of Debt ratio, it is above the average one. This is not good because it
means that Disney is operating with a large amount of short term debt, concretely a 39%.
Furthermore this ratio is similar throughout the years.

Liquidity ratios:

The current ratio has been below 1 since 2017, which means that Disney does not have
enough current assets to cover its current liabilities. This could be because of the huge
investments it has done during the recent past years.
At first glance, this could lead to problems of not paying in the maturity required, however,
we can see that the average sector is facing similar current ratios.
So, in order to proof if Disney can operate with a low current ratio we should compare
working capital needs (operating working capital) and Disney’s working capital. Doing this,
we can see that Disney has a deficit in working capital in 2018 15, which compared to the
average industry is a low deficit. Being able to operate with Working Capital Deficit might
be possible for Disney because its reputation.

In accordance with the quantity of cash with respect to current debt, the acid test it’s a little
bit low as it should be around 0.3. This might be because Disney needs to increase its levels
of cash, around a 5-6% of cash with respect to total assets compared to 4.21% they had in
2018. It also can be because of the bad quality of debt, i.e. having too much current liabilities.

Asset management

In relation to non-current assets turnover ratio, it is stable during the years and is over the
industry average even though they are involved in intense investing activities. This may be
due to the fact that those new fixed assets acquisitions (mainly already functioning
companies) give profits from day 1.

Current assets have increasingly been more profitable but remain still below industry
average although only by few basic points. Again it is a good sign that they are still almost at
industry average given the recent investment behaviour, as they carry on over the current
assets from other acquired companies.

Terms

Case written by Pedro Antonio Pérez, Albert Pérez, Andrea Martín and Mònica Balagué
10

with the supervision of Professor Oriol Amat. Universitat Pompeu Fabra, 2020.
2
Looking at the terms, they have really good inventory days but weak days receivable and
payable, all of them compared with the industry.

The difference between days payable and days receivable is positive and the inventory days
show that they do not have big stock, which means that they acquire a net cash credit and
they improve the working capital.

Although all of these are positive, the industry average shows that they could improve the net
amount of credit as the difference between days payable and receivable is significantly
higher.

Profitability

The return on assets is high (higher than the cost of debt), the return on equity is high as
well but both are lower than the industry average, similarly to the cash flow to assets ratio.
Again this can be explained via the high investments and that they have high equity to debt
ratio, which means that they are not very leveraged and more secure.

Regarding dividend policies, they have high dividend to profit ratio but the same dividend to
equity ratio compared to the industry. They show that the company has a high market
valuation in comparison to dividends distribution, so the markets consider the company a
staple within its core industries and to be a very secure investment for which they are willing
to pay a premium.

2. Main Financial Strengths and Weaknesses of Disney.

FINANCIAL STRENGTHS FINANCIAL WEAKNESSES

BALANCE
SHEET High equity (54% approx.). Current ratio (CA/CL) smaller than 1.
Liabilities represent just 46% of
the balance sheet. Although cash is huge, it represents less
than the optimal value of 30% of CL.
High amount of cash (4,150
million). Working Capital deficit (-112).

Days receivables (57) are much

lower than days payables (106).

Low financial expenses (1%)

CASH FLOW Positive Operating Cash Flow. Huge negative Financing Cash Flow.
STATEMENT
The company is able to generate
cash.

INCOME Consistent positive results year to High value of cost of products and services
STATEMENT year (profits). sold (55.06%) in comparison with
competitors (42.91%).
Continuous increase in profits
every year.

Positive ROI and ROE.

2
 High EBIT (24.91%) in comparison
with the industry (21.22%).

ROI is bigger than the cost of

money, so acquiring debt
increases profits.

Figure 16. Financial strengths and weaknesses of The Walt Disney Company.

3. Analysis of Disney’s working capital and working capital needed.

2018 2017 2016 2015

CURRENT ASSETS 16,825 15,889 16,966 16,758

CURRENT LIABILITIES 17,860 19,595 16,842 16,334

WORKING CAPITAL (CA-CL) -1,035 -3,706 124 424

Figure 17. Real working capital of Disney since 2015, in millions.

2018 2017 2016 2015

OPERATING CURRENT ASSETS (Inventories + Clients + Other 13,147 12,554 12,832 12,185
operating CA + Min. cash required11)

OPERATING CURRENT LIABILITIES (Suppliers + Other 14,070 13,423 13,155 11,771

operating CL +Accruals)

WORKING CAPITAL NEEDED (Op CA - Op CL) -923 -869 -323 414

Figure 18. Working capital needed of Disney since 2015, in millions.

2018 2017 2016 2015

REAL WORKING CAPITAL -1,035 -3,706 124 424
WORKING CAPITAL NEEDED -923 -869 -323 414
WORKING CAPITAL
SURPLUS/DEFICIT -112 -2,837 447 10
Figure 19. Working capital deficit/surplus of Disney since 2015, in millions.

As seen in the ratio analysis and the financial weaknesses one of the main problems of The
Walt Disney Company is that it has a working capital deficit, meaning that they lack some
financing to cover all their current liabilities to operate the business. If the situation is not

11
The minimum cash required used to compute working capital needed is a 10% of the
current liabilities.

2
solved, some liquidity problems could appear in the short term and maybe Disney should
look for some extra financing.

These problems started appearing since 2017, as the current ratio problems, this might be due
to the big investments incurred in these periods, such as the acquisition of Fox or the creation
of Disney+ or it could be simply for the kind of operations that Disney makes and the special,
diversified and complex industry in which it works.

In order to solve this problem, the company should take some measures in order not to have
liquidity problems, bettering the periods of the operating cycle in order to have a lower
working capital needed. Measures like negotiating longer periods to pay suppliers, collecting
earlier from debtors or invoicing customers earlier, should be easy for Disney, as it’s a
company that has a big reputation.

4.Computations of the UPF Z score since 2015 and their interpretation.

The formula used to compute the Z score is the following:

Z (UPF)= -3,9 + 1,28 CA/CL+ 6,1 E/A+ 6,5 NI/A+ 4,8 NI/E

This synthetic indicator created by UPF helps us predict bankruptcy by taking into
account short term solvency, self-financing, indebtedness and profitability.
▪ CA/CL means Current Assets / Current Liabilities,
▪ E/A means Equity / Assets,
▪ NI/A means Net income / Assets,
▪ NI/E means Net Income / Equity.

If the output is a positive number, the company has a financially stable situation.
Otherwise, the company may be in trouble of bankruptcy.

2018 2017 2016 2015

CA/CL 0.94 0.81 1.01 1.03

E/A 0.495 0.431 0.47 0.505

NI/A 0.128 0.093 0.102 0.095

NI/E 0.258 0.215 0.217 0.188

Z SCORE (UPF) 2.39 1.41 1.96 2.01

Figure 20. The Walt Disney Company’s Z score by UPF.

As we have just seen, Disney has had a positive Z score since 2015. This shows that
Disney’s financial situation is very stable and healthy, so defaulting in the following years is
very unlikely. Moreover, the Z score on 2018 is the highest of the past 4 years, so the
company seems to be running the business in a very comfortable situation with no risk of
default.

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5. Disney’s capacity to grow according the Higgins model.

2018 2017 2016 2015

Assets 98,598 95,789 92,033 88,182

Equity 48,773 41,315 43,265 44,525

Debt 45,766 50,785 44,710 39,527

Sales 59,434 55,137 55,632 5,2465

Net
Profit 12,598 8,890 9,391 8,382

Dividen
ds 2,515 2,445 2,313 3,063

Figure 21. Evolution of the accounts required to calculate capacity to grow according to
the Higgins model.

2018 2017 2016 2015

Capacity to grow (Higgins model):

M (1‒ D) x (1+L) /A ‒ M (1‒ D) x (1+L) 0.25 0.18 0.19 0.13

M = Net profit / Sales 0.22 0.16 0.17 0.16

0.20 0.28 0.25 0.37

D = Dividends / Net profit

L = Debt / Equity 0.94 1.23 1.03 0.89

A = Assets / Sales 1.66 1.74 1.65 1.68

Figure 22. Disney’s growth capacity using the Higgins model since 2015 until 2018.

The Walt Disney Company seems to have still huge capacity to grow according to the
Higgins Model. In 2018, their maximum sustainable growth rate was an outstanding 25%
annual growth rate, meaning that they could increase their sales for 25% for the next year
without increasing their equity and still be in a sustainable position.

However, chances that Disney will grow 25% per year are very reduced. They are already a
consolidated company with almost 100 years of life, so the real expected sales growth of the
company should be adjusted to its current characteristics. In fact, as it is previously
mentioned, the average growth in earnings of Disney for the last 5 years has been a very solid
9.6%.

2
For this reason, the Higgins Model result should be understood as whether the company is
financially healthy or not. Since the maximum growth rate is big, this means that the
company is profitable, efficient, with a proper management of dividends and a controllable
leverage.

6. Represent in a cause and effect diagram the different positive and negative
aspects of the company and how they are related.

Figure 23. Cause and effect diagram of Disney.

7. Recommendations to Disney

The company itself is running the business in a very healthy and sustainable way. However,
there are always some things to improve; in this case the three main problems the company
has are its short-term liquidity (due to their deficit in working capital), the quality of its debt
and the high cost of its revenues.
Short-term liquidity problems have been present since 2017 in the form of negative working
capital.
This issue could be solved in two different ways:

1. Reduce current liabilities. One of the simplest ways to do it is to renegotiate short-

term debt with the aim of transforming it to long-term debt. This way, current
liabilities decrease at the expense of increasing non-current liabilities.
2. Increase current assets. This can be done in many different ways, such as putting on
sale some non-current assets (so now they are listed on the current assets side) or
raising new capital in the form of current assets.

We will solve the issue using the first method: decrease current liabilities. It is the most
optimal decision since this transformation of current liabilities also helps us to solve the
second problem: quality of debt.

As we have just mentioned, the second problem the company is facing is the quality of its
debt. Their current liabilities to total liabilities ratio is 39%, so again a very good solution
would be transforming some of its current debt to long-term one.

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If the new objective is to have a ratio of 20% (a much more stable and healthy number), we
would need to do the following computations:

Total Liabilities = 45766

Current Liabilities NOW = 17860
Quality of debt (CL / Total L) NOW = 39%
Current Liabilities ADJUSTED = ?
Quality of debt (CL / Total L) ADJUSTED = 20%

If we compute the previous equation, we find out that Current Liabilities ADJUSTED should
be equal to 9153 million USD. In other words, we should decrease our current liabilities
(transform them into long-term debt) by 8707 million USD.

If we do this, our new current liabilities would be 9153 million USD, so our operating current
liabilities needed in the working capital also decrease:

Previous Operating CL = 14070

Previous Operating CL /Previous Current Liabilities = 79%
If we want to keep the same ratio for the adjusted Current Liabilities...
ADJUSTED Operating CL = 7211

This way, our working capital would be:

Current Assets = 16825

Current Liabilities = 9153
Working Capital = 7672

And our working capital needed would be:

Operating Current Assets = 13147

Operating Current Liabilities = 7211
Working Capital needed = 5936

And our surplus on Working Capital needed would be:

Working Capital = 7672

Working Capital needed = 5936
WC Surplus = 1736

Finally, the third problem we identified was the high cost of its revenues. When we compare
it to the average of the industry, we can clearly see how Disney direct expenses are much

2
higher in relative terms to its sales. If Disney solved this problem, their net income would
increase substantially.
How can Disney decrease their direct costs? There are several actions to take:

1. Negotiate contracts with their suppliers. Disney is a giant company that makes
huge orders to its suppliers. If they approach them and try to arrive to a new
agreement on prices, there are many chances that Disney will be able to reduce their
bill.
2. Calculate if they are “overspending” their budget in unnecessary or inefficient
processes.
There might be some processes during production that are not done properly and are
the reason for such an increase in costs. Doing a deep analysis on the processes taken
they might be able to save some of their budget.
3. Look for cheaper alternatives on those expensive processes. Disney might take
some really expensive activities with high costs that could be substituted for much
cheaper alternatives that provide the same results.

By doing a combination of the previous mentioned actions, Disney could be able to reduce
their direct revenue expenses by 15% with respect to revenues, being above the average
industry anyways but with a much higher gross margin.

8. Demonstrate the previous recommendations

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Figure 24. Demonstration of the effects of our proposal on the balance sheet.

Figure 25. Demonstration of the effects of our proposal on the income statement.

Figure 26. Demonstration of the effects of our proposal on ratios.

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BIBLIOGRAPHY
Introduction and History

https://d23.com/disney-history/

Industry analysis and Competitors

Sweney, Mark (2017): Film and TV streaming and downloads overtake DVD sales for first time, The Guardian.

Haselton, Todd (2018): The way you get TV and internet at home is about to change drastically — for the
better, CNBC.

Sylt, Christian (2018): 'Experience Economy' Boosts Theme Park Spending To A Record $45 Billion, Forbes

Whitten, Sarah (2019): Disney on pace to earn a record $9 billion at the global box office in 2019, CNBC

Barnes, Brooks (2018): Disney Is Spending More on Theme Parks Than It Did on Pixar, Marvel and
Lucasfilm Combined, The New York Times.

https://www.businessinsider.com/the-30-biggest-media-owners-in-the-world-2016-5?IR=T

https://www.statista.com/statistics/193140/revenue-of-the-walt-disney-company-by-operating-segment/

https://www2.deloitte.com/us/en/pages/technology-media-and-telecommunications/articles/media-and-
entertainment-industry-outlook-trends.html

Present Situation The Company is facing Now and Main Problems The Company Is Facing
https://markets.businessinsider.com/news/stocks/disney-stock-price-investors-are-facing-4-big-questions-
2017-3-1001866202-1001866202

Gray, Richard (2019): Did Disney shape how you see the world?, BBC.

Holland, Michael (2019): Disney heiress says employees unhappy with working conditions, New York Post.

Sanders, Bernie (2018): Disneyland workers face ruthless exploitation. Their fight is our fight, The Guardian.

Fundamental Analysis of The Stock

https://www.tradingview.com/symbols/NYSE-DIS/

https://simplywall.st/stocks/us/media/nyse-dis/walt-disney#past

https://wallmine.com/nyse/dis

Appendix

https://www.thewaltdisneycompany.com/investor-relations/

Viacom’s 2018 report: https://sec.report/Document/0001339947-18-

000046/#s6beb6c4f533b4e45a810f18e7c77a413

News Corp’s 2018 report: https://newscorpcom.files.wordpress.com/2018/09/news-corp-2018-annual-

report.pdf

Comcast’s 2018 report: https://www.cmcsa.com/static-files/54b28afa-2286-46bc-bca0-

e35c9a4be739